From the world of general insurance
AIG and other fall-out from the global financial crisis
In mid-May, AIG announced a disappointing US$4.35bn net loss for the first quarter of 2009; whilst this was its smallest loss for 6 quarters, it fell short of analysts’ expectations. The company blamed restructuring costs and adverse publicity from its recent troubles. The latter issue appeared to have contributed to a fall of 17.5% in general insurance net premiums. At about the same time, AIG finalised the deal for the sale of its Tokyo office to Nippon Life Insurance Company for US$1.2bn – completion is expected by the end of June. However, Poland’s state-run bank PKO has dropped plans to purchase AIG’s business in that country. At the end of May, AIG announced plans to sell off a major stake in Transatlantic Holdings, owner of Transatlantic Re and other reinsurance entities, reducing its involvement from 59% to below 20%.
By the end of May, Edward Liddy, AIG’s chairman and chief executive, had announced that he is resigning from the difficult roles after only 8 months. The AIG board has agreed with Liddy’s recommendation that the two roles should be separated, so he will be replaced by two people. He will remain with the company until replacements have been recruited. Liddy received considerable praise from government quarters for his efforts during his brief but fraught tenure.
Harking back to earlier problems at AIG, investors who suffered loss as a result of the financial accounting scandals in the six years up to 2005 (which led to the resignation of the then chairman and chief executive, Hank Greenberg) are to receive compensation amounting to US$843m. This results from the decision of a US district court on the distribution of the compensation fund provided by AIG following the earlier investigations by the Securities and Exchange Commission.
The value of letters of credit (LOCs) in the current economic climate has been questioned by various industry spokespeople. The basic purpose of an LOC as used in the reinsurance industry is to protect the reinsured from the possible failure of the reinsurer, but this is unlikely to be a sensible approach if the security of the bank providing the LOC is no better than that of the reinsurer. The provision of LOCs by a bank could actually impact adversely on their own solvency, as this requires them to ring-fence capital, which may also be needed urgently for funding purposes.
Regulatory and legal developments
It is understood that the UK Financial Services Authority (FSA) is keen to be able to use plea-bargaining in discussions with parties who may be prepared to provide evidence of financial crimes in exchange for immunity from prosecution. This procedure, currently used in the United States, is proposed in the current Coroners and Justice Bill, although such arrangements have historically been frowned on in UK. The impact of such procedures on Directors and Officers (D&O) policies, where cover does not normally exist for illegal acts, is also problematic – is a whistle-blower who has arranged a plea-bargain with the FSA covered? – if they are not guilty of any crime, why did they negotiate a plea-bargain?
The FSA has fined Morgan Stanley £1.4m for failure to have systems and controls in place to prevent one of its traders mis-marking, and also banned and fined the trader – the company suffered a US$120m loss from the failure in 2008. This is believed to be an indication of a tougher stance being taken by the regulator, which may result in an increase in the number of UK D&O claims.
Towards the end of May, a revised version of the Non-Admitted and Reinsurance Reform Act was introduced in the US House of Representatives. This would establish national standards for how states regulate US reinsurance and Surplus Lines insurance business. The new version is similar to ones passed in each of the last two years, but so far there has not been a successful passage of a bill through the Senate. The insurance industry is hopeful that, following the US political changes in last autumn’s elections, a Senate bill may be successful this year.
Lloyd’s
Within days of each other, two international insurance groups (WR Berkley and RenaissanceRe) announced that they were to establish new syndicates at Lloyd’s. WR Berkley has launched Syndicate 1967, managed by Whittington Capital Management, which commenced writing property and accident business on 1 June. RenaissanceRe’s new insurer is Syndicate 1458, managed by Spectrum Syndicate Management, writing commercial property and specialty lines business incepting after 1 June.
Another indication of the current investment situation in Lloyd’s was given by James Sparrow of the members agency Alpha Insurance Analysts, who stated that interest from private investors is now at a 15-year high, and that he expected a considerable number of special purpose Lloyd’s syndicates (SPSs - which operate as a form of sidecar) to be established with private capital backing them. In addition, he expected SPSs to support a wider range of business classes rather than concentrating on catastrophe insurance as has historically been the case. Interest from high net worth individuals in member’s agent pooling arrangements is also said to be at a high level.
Chaucer, the Lloyd’s insurer, which had a number of approaches from potential suitors earlier this year, has now announced a further bid, from Pamplona Capital Management, which is interested in acquiring a 29.9% stake in Chaucer. Chaucer continues in discussion with all the other parties which remain interested.
Equitas, the reinsurer of Lloyd’s 1992 and prior liabilities, has announced plans to transfer all such liabilities to a new company using a Part VII transfer – potentially the largest Part VII transfer ever completed. If this is approved by the UK High Court the reinsurance coverage provided by National Indemnity Company (a Berkshire Hathaway subsidiary) for these liabilities will also be increased by US$1.3bn. If successful, the transfer will provide complete finality to Lloyd’s members from 1992 and prior years under English law, although some uncertainty may remain in other jurisdictions.
Marine kidnap and ransom (K&R) and piracy
The International Maritime Bureau has revealed that there were 102 incidents of piracy in the first quarter of 2009, 61 of them in the Gulf of Aden area. Whilst the numbers in this area have increased ten-fold since 2008, those in the rest of the world have remained virtually unchanged.
Controversy has arisen between protection and indemnity (P&I) clubs and marine war risks underwriters as to whether piracy risks are excluded under the P&I war exclusion. Apparently, they are not specifically excluded but the use of weapons of war does give rise to exclusion from the P&I cover. Some of the Somali pirates are now using rocket-propelled grenades and automatic rifles, which leads to the current uncertainty.
Mergers and acquisitions developments
In spite of the agreement between the boards of IPC Holdings and Max Re, announced last month, Validus continued with their attempt to pre-empt the merger in favour of its own merger with IPC. At the beginning of May, Validus announced a plan involving:
>> Getting IPC shareholders to vote against the agreed merger
>> Commencing an exchange offer for all IPC common shares
>> Petitioning the Bermuda Supreme Court to approve a scheme of arrangement
A few days later the Max/IPC deal received approval from the US Securities and Exchange Commission, and these two companies were planning to take the matter to their respective shareholders on 12 June. By the middle of May, the Bermuda Supreme Court had rejected Validus’s request for early hearing in its case against IPC and Max Re. Nevertheless, before the end of the month, Validus had increased its offer for IPC by about 3.6% by adding a cash element into the existing share offer.
The acquisition by BNP Paribas of 75% of Fortis Bank, which owns the Fortis Group’s Belgian insurance interests, was finally closed in mid-May, following the approval of shareholders at the end of April.
General Re/AIG court case
Ronald Graham, the final defendant in this fraud case, was sentenced to 12 months and one day in jail and a US$100,000 fine. Graham was assistant general counsel at General Re and was convicted of conspiracy, mail fraud, securities fraud and making false statements to the US Securities and Exchange Commission.
US National Flood Insurance Program (NFIP)
President Obama has opposed plans to extend the NFIP to include windstorm coverage as well as flood protection. The insurance industry welcomed the news, and pointed out that the commercial insurance market, supported by state residual markets, already provides windstorm coverage across the US. In addition there was some concern that such an extension could further increase NFIP’s debt, which already stands at US$19bn.
RSA job cuts
RSA has announced that it is to close its Bristol office by 2010, with the loss of 400 full-time and 100 part-time jobs. This move is part of the 1200 job cuts announced in February in a cost-cutting initiative.
Citizens Property Insurance (CPI) and Florida Hurricane Catastrophe Fund (FHCF)
CPI, the wind insurer of last resort in Florida, has decided to purchase its 2009 reinsurance from the state-owned FHCF, and will pay US$546m for 90% coverage of around US$9.4bn above its retention. CPI chose FHCF as its reinsurer because it was cheaper than the private reinsurance alternatives.
Tsunami hazard in Caribbean
Geologists have warned that there are signs that a large chunk of rock on the Devil’s Peak volcano in Dominica is showing signs of collapse into the sea. The worst-affected element weighs an estimated million tons, and could cause a 10 foot tsunami in the area. There are also fears that a further 3 million tons of rock further up the slope could be weakened by any collapse, with resulting potential for an even larger tsunami.
Climate change
The US government has backed a proposal for the development of risk-transfer projects, including insurance mechanisms, in any climate deal agreed at the United Nations Climate Change Conference in Copenhagen in December. In particular, a US submission to preliminary meetings has called for improved data assessment to provide inputs for approaches such as parameterised insurance. Any insurance mechanism is likely to be funded by developed countries to cover the costs of catastrophes overwhelming the capacity of developing countries to adapt to climate change.
The Catlin Arctic Survey, sponsored by the Lloyd’s insurer, has had to shorten its intended timescale by a week in view of the early summer break-up of the ice, and the members of the team were picked up on 15 May. The principal finding that has been disclosed to date is that the vast majority (over 99%) of the ice is younger thinner ice, whereas scientists had predicted that it would be a mixture of this with older thicker ice – this gives rise to the possibility that incorrect data has been used in projections over the last 20 years.
New research by the Massachusetts Institute of Technology has revealed that, without rapid and massive action, global temperatures could rise by more than 7 degrees Celsius by the end of the century, leading to vast numbers of deaths. These results are considerably more severe than those of their previous projections.
Large losses
Wildfires in South Carolina, US – 22-28 April.
These, the largest to hit the area for over 30 years, affected a coastal region near Myrtle Beach. Around 200 homes were destroyed or seriously damaged, nearly 20,000 acres were burnt and 2,500 people were evacuated. An early insured loss estimate is “at least US$25m”.
Typhoon Kujira, Philippines – 2-5 May.
This is the first named storm of the 2009 western Pacific season and brought heavy rain, floods and landslides to a considerable area of the northern Philippines. It caused 33 deaths and displaced nearly a quarter of a million people. No insured loss estimate is to hand, but expectations are that any losses will be moderate, given the low insurance penetration in the area.
Jesusita wildfires, California, US – 5-13 May.
These affected the prosperous area around Santa Barbara, and led to mass evacuations. 10,000 acres were affected with about 100 homes destroyed or seriously damaged. Early indications suggest that insured losses will exceed US$100m.
Cyclone Chan Hom, Philippines – 7-9 May.
This hit a very similar area to Kujira (see above) and particularly the island of Luzon. As a result, the overall displacement of people from the two storms increased to over 400,000, with an additional 43 deaths related to Chan Hom. Again insured losses are expected to be relatively low.
Airline disappears over Atlantic Ocean – 1 June.
An Air France Airbus 330-200 plane en route from Rio de Janeiro to Paris with around 200 passengers (and over 220 in total including crew) on board. As at the date of writing, very little further information is available, although it is understood that the hull may be insured for nearly US$100m, with coverage led by Axa.
